Health Care Reform, PCORI Fee, Taxes, Fees & Penalties

PCORI Fee Update: June 2013

NOTE: This article was revised on June 14, 2013 to include links to the revised Form 720 and to note the DOL guidance that the fee cannot be paid from plan assets. 

The Affordable Care Act (ACA) established a private, nonprofit corporation called the Patient-Centered Outcomes Research Institute (PCORI). The Institute will objectively study and report on the effectiveness of various medical treatments. To help fund the Institute, an annual fee per enrollee will be assessed on all health plans based on the average number of employees, spouses and dependents enrolled. For non calendar year plans, the fee is effective between September 30, 2012 and September 30, 2019. For calendar year plans, the fee is effective January 1, 2012 through 2018.

The fee assessed is $1.00 per enrollee the first year, and $2.00 per enrollee the second year. Thereafter, the fee will be indexed for inflation. The fee applies to all types of health plans: insured group health plans, individual policies and self-funded health plans, both grandfathered & non-grandfathered. For insured plans, the fee is paid by the carrier, and for self-funded plans the fee is paid by the plan sponsor.

Recent Guidance on PCORI Fees

In December 2012, final regulations were issued on the payment of the PCORI fee. In April 2013, the IRS issued the revised Form 720 (Quarterly Federal Excise Tax Return) and Instructions to include the reporting and payment of PCORI fees. In June 2013 the IRS issued a legal opinion that the PCORI fee is a tax-deductible expense (under Code section 162(a)) for self-insured plan sponsors and for health insurers. The Department of Labor (DOL) had previously indicated that PCORI fees for self-insured plans must be paid by the plan sponsor because such fees are not permissible “plan expenses” under ERISA, because by law they are imposed on the plan sponsor and not on the plan itself.   This summary explains the PCORI requirements, as modified by these recent regulations and other guidance.

Health plans and policies subject to the fees

Subject to the fee:
The fee applies to plans that provide accident or health coverage primarily for individuals living in the U.S. including HMOs and retiree-only health plans

Not Subject to the fee:
The fee does not apply to the following plans or policies:

  • Certain “Excepted Benefits”
    • Limited-scope dental and vision benefits that are “excepted benefits” under IRC section 9832(c). These are either insured benefits that are under a separate contract from insured medical benefits, or are benefits that medical plan participants can elect not to receive, and if they elect to receive them they must pay an additional amount for the dental or vision coverage.
    • Health FSAs that are “excepted benefits” under IRC section 9832(c). These are HFSAs under which the maximum benefit for the year does not exceed two times the participant’s salary reduction election for the year, or, if greater, the participant’s salary reduction election plus $500; and the employee has other regular medical coverage (that is not an excepted benefit) available under a group health plan of the employer for that year.
    • Accident and disability benefits
    • Workers’ compensation
    • On-site medical clinics
    • Long-term care benefits
  • Employee assistance programs, disease management programs or wellness programs that do not provide significant medical benefits.
  • An HRA that is bundled with a self-insured major medical plan (e.g., PPO or HDHP) is not subject to a separate fee. But an HRA that is bundled with a fully-insured major medical plan is subject to a separate fee (calculated by including only employees–not dependents- in the total participant count). The reason is that the PCORI fee applies separately to insured and self-funded plans, and the carrier pays the fee for an insured plan while the plan sponsor pays the fee for a self-funded plan.
  • Health Savings Accounts
  • Expatriate policies
  • Stop-loss or indemnity reinsurance policies
  • SPECIAL NOTE: The sponsor of multiple self-funded group health plans with the same plan year needs to pay only one fee for such plans. Thus, an employer with a medical plan and a separate prescription drug plan, health FSA, or HRA (with the same plan year) will not need to pay multiple fees for the same individual.

Final Regulations Issued December 2012 clarify the following:

The final regulations clarify that the following types of programs are not subject to the PCORI fee, whether the programs are fully-insured or self-funded:

  • Employee assistance programs and disease management or wellness programs that do not provide significant medical benefits
  • Expatriate policies that were designed and issued specifically to cover employees working and residing outside the United States

The final regulations also clarify when continuation coverage (like COBRA or similar federal or state coverage laws) is subject to the PCORI fee. When it is, participants in these plans (as well as in retiree only plans) count as covered lives for purposes of the fee.

The fee and how it is calculated

The fee calculation:

The average number of covered lives under the plan or policy during the year
  X
The applicable fee amount for the year (e.g., $1 for 2012 plan year)

The applicable fee amount:

  • $1 for plan years ending on or after October 1, 2012 and before October 1, 2013.
  • $2 for plan years ending on or after October 1, 2013 and before October 1, 2014.
  • For subsequent plan years ending before October 1, 2019, the fee will be adjusted for projected increases in national health expenditures.

The fee is scheduled to sunset for plan or policy years ending after on or after October 1, 2019.

Calculating the average number of covered lives

For self-insured plans: Plan sponsors will make the calculation and may select from the following calculation methods:

  • Actual count method
    • Total number of lives covered for each day of the plan year, divided by the total number of days in the plan year.
  • Snapshot method
    • There are two types of snapshot methods. For both types, figure the total number of lives covered on one or more dates in each quarter, divided by the total number of dates on which the count was made.
      • §  Snapshot factor method:  The sum of (1) the number of participants with self-only coverage on that date, plus (2) the number of participants with coverage other than self-only coverage on the date multiplied by 2.35
      • §  Snapshot count method:  The number of lives equals the actual number of lives covered on the designated date. The number of lives covered on a date may be determined as equal to either the sum of the actual number of lives covered on the dates
  • Form 5500 method
    • This number is derived from the number of total participants reported on the Form 5500.

§  If the plan only provides self-only coverage, covered lives equals the number of plan participants at the beginning and end of the plan year, divided by two.

§  If the plan offers coverage other than self-only, the plan sponsor determines covered lives by adding the number of plan participants at the beginning and end of the plan year.

    • This method is  allowed as long as the 5500 is filed no later than the July 31 PCORI fee due date

For insured plans: Health insurance issuers (carriers) will make the calculation and pay the fee, and they may select from the following four calculation methods.

  • Actual count method
    • Total number of lives covered for each day of the plan year, divided by the total number of days in the policy year
  • Snapshot method
    • For each policy, the sum total number of lives covered on one date in each quarter of the policy year (or an equal number of dates for each quarter) divided by the total number of dates on which a count was made.
  • Member months method
    • Calculated on an NAIC Exhibit filed with the carrier’s annual financial and insurance filing (NAIC is the National Association of Insurance Carriers)

§  Take the “member months” that are reported on the NAIC Commissioner’s Supplemental Health Care Exhibit and divide this number by 12.

  • State form method
    • In some states, NAIC forms are not files, but these states use forms that report covered lives in the same manner.

§  Take the “member months” that are reported on the state form and divide this number by 12

There are special rules for calculating the average number of covered lives for the first and last years for which the fee is assessed. For non-calendar year plans, use pro rata approach when calculating fees for 2012 and 2019.

Final Regulations Issued December 2012 clarify the following:

To clarify the “snapshot method,” the final regulations state a plan need not pick the same date in each quarter. Instead, each date used for the second, third and fourth quarters may be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates used must fall within the same policy year or plan year.

If a plan uses multiple dates for the first quarter, the issuer or plan sponsor must use dates in the second, third, and fourth quarters that correspond to each of the dates used for the first quarter or are within three days of such corresponding dates, and all dates used must fall within the same policy year or plan year.

To clarify which individuals/lives must be counted in the case of multiple arrangements and HRAs and Health FSAs, the final regulations:

  • Permit a self-insured health plan that provides accident/health coverage through fully-insured options and self-insured options to disregard the individuals covered solely under the fully-insured options for purposes of the fees. The carrier of the fully-insured option will count these individuals in calculating its PCORI fee.
  • Clarify that two or more self-funded arrangements established or maintained by the same plan sponsor that provide for accident and health coverage other than through an insurance policy and that have the same plan year may be treated as a single applicable self-insured health plan
  • Permit a plan with an HRA or FSA to assume one covered life (instead of paying twice) for each employee as long as the FSA is an “excepted benefit”

Transition Relief. The final regulations retain the transition relief provided under the proposed regulations for counting covered lives during the period before regulations were issued. Some commenters had requested additional relief, but the final regulations deny their requests.

How and when the fee is paid

The fee is paid only once a year through revised Tax Form 720 (Quarterly Federal Excise Tax Return), on the second quarter filing (even though this form is otherwise used for quarterly filings). The annual PCORI fee deadline is July 31 of the calendar year immediately following the last day of the policy or plan year.   For example, for a plan year ending on December 31, 2012 the form must be filed by July 31, 2013.

For insured plans, the carrier is responsible to pay the fee; for self-funded plans, the plan sponsor is the responsible party.  As noted previously, in June 2013 the IRS issued a legal opinion that the PCORI fee is a tax-deductible expense (under Code section 162(a)) for self-insured plan sponsors and for health insurers.

Additionally, the Department of Labor (DOL) indicated earlier that PCORI fees are not permissible “plan expense” under ERISA, because by law they are imposed on the plan sponsor and not on the plan itself.  This means that the PCORI fee must be paid by the plan sponsor and not from plan assets (e.g., not from participant contributions or trust assets), because ERISA’s prohibited transaction rules prohibit the use of plan assets to pay expenses that are the employer’s obligation. 

Final Regulations Issued December 2012 clarify the following:

Late fees that apply to filing Form 720 by July 31 of every year when paying the PCORI fee MAY be waived if the issuer or plan sponsor has reasonable cause and the failure was not due to willful neglect. Fees may NOT be waived for inadvertent error. Third parties may not file the fee.